Title

A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application

Author(s)

Pinelopi Koujianou Goldberg Pinelopi Koujianou Goldberg (Princeton University, NBER, and BREAD)

Rebecca Hellerstein Rebecca Hellerstein (Federal Reserve Bank of New York)

Abstract

The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a framework for identifying the sources of local-currency price stability. The empirical approach exploits manufacturers? and retailers? first-order conditions in conjunction with detailed information on the frequency of price adjustments in response to exchange-rate changes, in order to quantify the relative importance of markup adjustment by manufacturers and retailers, local-cost non-traded components, and nominal price rigidities, in the incomplete transmission of exchange-rate changes to prices. The approach is applied to micro data from the beer market. We find that on average, 54.1% of the incomplete exchange rate pass-through is due to local non-traded costs; 33.7% to markup adjustment; and 12.2% to the existence of price adjustment costs.

Creation Date

2008-03

Section URL ID

CEPS

Paper Number

185

URL

https://gceps.princeton.edu/wp-content/uploads/2017/01/185goldberg.pdf

File Function

Jel

C010, E500, F130, F320, G100

Keyword(s)

currency prices, exchange rates

Suppress

false

Series

3